Cattle Prices Are Too Low, CME Economists Say

How long will cattle prices will stay at current
"exorbitant" levels and will we see a decline in the coming months? The economists who write the CME Group’s Daily Livestock Report say that cattle prices aren’t too expensive, they’re too cheap. That’s because the U.S. livestock and poultry sector has undergone a significant input price shock in the last three years and we have yet to see the full effect of it, they say.

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How long will cattle prices will stay at current "exorbitant" levels and will we see a decline in the coming months? The economists who write the CME Group’s Daily Livestock Report say that cattle prices aren’t too expensive, they’re too cheap. That’s because the U.S. livestock and poultry sector has undergone a significant input price shock in the last three years and we have yet to see the full effect of it, they say.

For better or worse, the U.S. livestock and poultry sectors during the second half of the 20th century became increasingly dependent on an abundant and inexpensive corn supply. Diets for cattle, hogs and poultry were constructed to take full advantage of inexpensive corn.

Corn prices have moved from an average price level of about $2.50/bu. from 1980-2005 to a much higher plateau; possibly one in the $5- $6 range, although the proper level will take time to materialize.

In the last decade, U.S. livestock producers have had to deal with increased competition for corn, particularly ethanol. Ten years ago, more than half of the U.S. corn supply went into livestock feed; today, livestock feed accounts for 37%. More importantly, the rise of ethanol demand meant that the old corn supply base was insufficient and that higher prices were needed to induce producers to bring more acres into production and boost productivity by maximizing resource use.

This is all good news for corn producers but it implies a very different cost structure for livestock and poultry producers. While cash fed-cattle prices are well over $100/cwt., in the context of $6 corn, that price is on the low end of what producers need to get to bring their costs and margins in line.

Cattle feeders are now using more ethanol by-products, and pastures provide a less expensive option to add pounds to cattle. But, as corn prices move up, the price of just about every other feedstock will also increase.

“If corn prices hold at around $6/bu. (some are thinking even higher money to ration demand and ‘buy’ more acres this spring), then fed-cattle prices need to fetch about $130/cwt. to come back anywhere close to the five-year average ratio levels. Much higher cattle prices (or sharply lower corn prices) will be needed to return to the longer run levels of the past two decades,” the economists say.

In the short term, the input price shock has boosted beef supplies as cow-calf operators have liquidated the beef cowherd and limited heifer retention. Indeed, if corn prices continue to climb, we may see further liquidation even at current live-cattle and feeder-cattle prices. However, in the long term, the livestock industry will need to adjust to the new level in feed prices, and for that to happen, cattle prices will have to be at significantly higher levels.

This isn’t good news for U.S. retailers and foodservice operators, who may see some of their margins shrink as they try to pass on the higher costs. And unless U.S. consumers are willing to change their food consumption habits and standard of living, this also implies that meat purchases will take a larger portion of the take-home pay in the coming years.-- CME Group Daily Livestock Report